Saturday, April 4, 2020

A Current AIM International Equity Holding: SAP SE (SAP, $108.71): “Is SAP a Sappy Story?”

SAP SE (SAP, $108.71): “Is SAP a Sappy Story?”
By: Vicente Cabrera, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
SAP SE. (NYSE:SAP) SAP is a German software company that engages in selling licenses for business software solutions and software related services. The company operates mainly through two business segments: Applications, Technology and Services (85.4% of 2019 Revenues), in which licensing subscriptions are sold; and Intelligent Spend Group (11.4%), in which involves their cloud and education services.
• We continue to see strong adoption of S/4HANA as the core factor of intelligent enterprise across all deployment models.
• Strong increase in non-IFRS profits and margins
• World's largest enterprise software company that offers massive scale and power of data. SAP also runs the world's large business network with over $3.6 Trillion in commerce annually.

Key points:
Successful transition of business model. With the fast-growing cloud industry, SAP has been transitioning towards the cloud subscriptions and support revenue and software support revenue. This revenue is estimated to reach 70% of total revenue in 2020 and reaching 80% in 2023. This will lead to a higher share of more predictable revenue and allow SAP to create stronger connections with their clients. In Q4 cloud revenue was up +35% to €1.9 billion. Cloud margins has also increased 6.9% to 65.2%. The increase in cloud orders and profitability has a strong indication that SAP is growing and will continue to grow in the foreseeable future.

SAP cashflows have decreased YoY. Operating cash flow for 2019 was €3.5 billion, a decrease of 19% YoY. This was due to higher payouts related to share-based compensations, restructuring payouts, and higher tax cash outflows. Free cashflow also decreased 20% YoY to €2.28 billion.

As expected, operating profit, operating margin, and earnings per share decreased because of  the high acquisition charges due to the Qualtrics acquisitions and due to the global restructuring program. In 2019, operating profit was down 21% to €4.5 billion; operating margin dropped 6.8%; earnings per share decreased 18% to €2.8.

Past Year Performance:
Over the past year, SAP has decreased .37%. This is due to the corona virus and the fear of it continuing to impact the economy and companies. As a result, SAP is considered a bargain currently. Looking at the street estimates in FactSet, the analysts believe the company should be valued at $150. Currently the company is priced at $108, so there is huge upside.

Source: FactSet

My Takeaway

After looking at SAP, I believe the company is in good shape and will recover from the +13% drop because of the corona virus. In fact, I believe we should double up on the company to lower the average cost and experience great gains in the future. The higher payouts, the high acquisition cost of Qualtrics, and the global restructuring program impacted the company, but the company is still very profitable and a great investment.

Source: FactSet